For the purposes of this survey, more than 1,200 owners of privately held companies were contacted. Nearly 60% of the respondents had between 11 and 100 employees. So this survey truly captures the middle-market private business community.

Since they started this survey two years ago, Pepperdine has seen a gradual improvement in overall business owner confidence. Net increases in confidence were only 1.3% in the fall of 2009, increasing to 17% in the spring of 2010 and to more than 18% in fall 2010.

Business owner confidence has increased 36% in the latest survey. So over the past two years, private business owner confidence has dramatically improved. Of course given that Pepperdine began their surveys during the midst of the last recession, it is not surprising that private business owner confidence has improved significantly since then.

What You Need To Grow

About 95% of the folks taking the survey indicated that they “had enthusiasm to execute growth strategies” but only 53% had the capital needed or access to capital to successfully execute their growth strategies. Isn’t this the common issue all of you face as owners of middle-market businesses? You have great ideas for expanding your business but you lack the resources to do so. You may have tapped out your line of credit simply to survive the recession, and as we all know, lending standards have tightened in the past 3 years. Raising capital has never been more challenging and you are not alone in this dilemma.

Private business owners essentially have three options when you reach the point where raising capital for growth via traditional methods, such as your bank, is nearly impossible:

Simply maintain the status quo. You are probably making enough money to live comfortably and sustain your business. However, in the long run, you have to look at your company as an investment. Would you invest several million dollars in the stock market to not realize any gain? By choosing the “maintenance” mode for your business, you are essentially doing that.

Find an investor. An outside investor, especially an equity firm with the experience and financial strength to help grow your business would be one option. Under this scenario you would need to give up partial, if not majority, ownership of the company. But it would allow you to have access to capital for expansion.

Outright sale. Finding a buyer who sees your vision for the company and has the experience plus capital for growth is another option. This is really the best alternative to pursue for those of you that are older. Under this scenario, you want to find a buyer who sees the potential in your business and is willing to pay you a premium for it. For the five mistakes to avoid when selling a family-owned business, click here.

So I was interested to see the results of the Pepperdine survey regarding planned ownership transfer:

Source: Pepperdine Private Capital Markets Project – Summer 2011

When asked about the methods they were considering using when transferring ownership of their business, over half indicated that they would explore an outright sale. Another 10% would look for an investor or investment group. The two combined far outweighed a much more risky method: family transfer.

Family transfer usually does not result in the new business reaching the level of growth and profitability that you are dreaming about. Family transfer typically requires the founder to provide the financing for the deal, meaning that a majority of the proceeds will be paid to you in future years. You will be completely dependent on the ability of your family members to not only run the business but to also provide ongoing capital for its growth. A very risky proposition, indeed, since they will be making payments to you from the earnings of the business. This will make it even harder for them to obtain bank financing. If you’re considering family transfer, consider learning about exit planning basics first.

The New Focus

According to this survey, after cutting and slashing costs to survive the last recession, private business owners are now primarily focused on revenue growth.

Source: Pepperdine Private Capital Markets Project – Summer 2011

As you can see, growing the business via increased revenues from current products was the most important area being focused on for a vast majority of respondents. But note also that expansion into new product lines at 21% also dwarfed cutting costs. This tells me that the middle market is poised for growth. No longer is cutting expenses the primary option – all the fat is gone. U.S. businesses are now leaner than ever and are in a position to really take off as the economy improves.

Also note that only 3% of the small business owners surveyed are looking for acquisition targets. This of course does not represent the entire buying community since these are largely smaller companies who, as we have discussed, need capital simply to grow. The Pepperdine report also surveys other players in the capital markets industry including investment banks, financing sources, business brokers, and equity firms, which are all much more representative of the true mindset of the professional buying community.

If you would like to see the entire report, you can download a copy of it by clicking here.

If you’re a private business owner of a family-run operation, learn how to identify your intangible assets to get the maximum value for your company when it’s time to sell. Click here to download the free whitepaper.

About Carl Doerksen

The Private Business Owner – A Generational Equity Blog

The Private Business Owner is an online publication sponsored by Generational Equity. PBO aims to provide useful tips and information that will improve both the lives and businesses of entrepreneurs, as well as provide valuable insight into the company exit process through bi-weekly M&A Digests.